The Market Value of Firm L's Debt Is $200,000 and Its

question 17

Multiple Choice

The market value of Firm L's debt is $200,000 and its yield is 9%.The firm's equity has a market value of $300,000,its earnings are growing at a 5% rate,and its tax rate is 40%.A similar firm with no debt has a cost of equity of 12%.Under the MM extension with growth,what would Firm L's total value be if it had no debt?

• A) $358,421
• B) $377,286
• C) $397,143
• D) $417,000
• E) $437,850

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Definitions:

Sinking Fund

A fund that accumulates cash to pay off bonds when they are retired.

Interest Revenue

Income earned from lending money or investments in interest-bearing financial instruments.

Contract Rate

The interest rate stated in a contract, such as a loan or lease agreement.

Semiannually

Occurring or conducted twice a year.